Hard Money Loans Explaination

5 Replies

Hello Bigger Pockets world. I was hoping someone can help breakdown what a hard money loan would look like. I know that every deal is different and everything can be negotiated but how does a hard money loan generally work? For example: $100,000 @ 12%. Are there monthly payments? If so, when do they start? Do I simply take $112,000 of profits and pay it as a lump sum back to the lender? Any tips or discussion would be greatly appreciated.

Besides 12% of interest, the HML may charge you points , generally 2 points that will be added to the monthly interest payment . Also they might roll in the closing costs for buying and selling ( in case you want to sell) the property . The note begins the day you sign the purchase and sale agreement in my experience

Most HML are going to want monthly interest payments. Some may ask for points in advance. They usually only want 1st position and want you to have skin in the game (money). Generally, when the property is flipped you get paid off. Terms are usually short, often as little as one year. DO NOT pay advance fees. Those are almost always con games. They get your money and you will never get the loan.

Updated 3 months ago

Correction: Some may want points at closing. If they want them in advance, that is a BIG RED FLAG.

John Thedford, Real Estate Agent in FL (#BK3098153)
239-200-5600

@Will Biestek Every hard money lender will operate differently. As people on this thread have mentioned, you can expect to pay interest only monthly payments on a 1 year term (i.e. 12% on $100,000 = $12,000/yr or $1,000/mo) and origination points to close the deal (i.e. 2 points = 2% of the loan amount - $2,000 + typical closing costs). The balance of the $100,000 principal will be due upon resale of the property.

Some lenders may require an appraisal to ensure the resale value is as you state, which is normal in today's market for hard money. If that's the case, expect to pay $300-$600 to the appraisal company directly. If a lender ask you to pay this to their personal/business account directly, be weary. All other fees (origination fees/down payment/closing costs) should be contributed to a 3rd party escrow/attorney account before closing on the property. 

Hope this helps you navigate the waters!

Thank you everyone for the information!

@Will Biestek   Adding in, if you're rehabbing you'll probably have to pay for inspections to make sure the work is complete, not a ton, but probably a couple hundred per inspection, 2 - 3 inspections.  Remember typically you have to "front" that work expense, and then you'll be reimbursed in draws.

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